1 1 AIPLA American Intellectual Property Law Association Fair, Reasonable and Non-Discriminatory (FRAND) Terms Daphne C. Lainson Smart & Biggar AIPLA Annual Meeting: IP Practice in Japan Committee October 2013

2 2 AIPLA The FRAND Pyramid Dispute Resolution Negotiation Adoption of Standard by Standard Setting Organization (SSO) Obligations to disclose IP rights/ License on FRAND terms Standard Essential Patent (SEP)

3 3 AIPLA Competing Interests Adoption of standards –Lower production costs and costs to consumers, “shared” R&D expenses, reduced switching costs for consumers, more efficient uptake of new technologies, expanded customer base for standard compliant technologies, enhanced innovation around standards, improved product quality But: –Potential for abuses by SEP owners, lobbying/bias over standard setting, reduction of competition once standard adopted

4 4 AIPLA Standard-Setting Organizations (SSOs) Develop and set industry standards –Voluntary membership –Different IPR obligations Disclosure, FRAND commitments Commitment to licence ≠ licence Do not define FRAND terms Actual licensing: negotiation outside of SSO and as between parties –Expectation: negotiations will be in good faith

5 5 AIPLA What is FRAND? No single, precise definition Fair –Terms are not anti-competitive Tied selling, bundling, free grant backs, exclusive licensing/restrictive covenants on licensing to other parties Reasonable –Royalties do not result in uncompetitive pricing “ Price-stacking ” Non-discriminatory –All licensees are provided with similar terms and rates

6 6 AIPLA SEPs/FRAND Concerns Hold-up by SEP owner –Standard adopted and SEP owners engage in heavy handed negotiation (e.g., demanding excessive royalties) or withhold SEP protected technology –Impacts adoption of standard, increases cost to implementers and potentially consumers, affects other owners of SEPs for that standard Royalty Stacking –Single product, multiple standards and SEPs = cumulative excessive royalties

7 7 AIPLA SEPs/FRAND Concerns Availability of injunctive relief –Equitable remedy: eBay Inc. v. MercExchange LLC (2006) 126 S Ct Factors: irreparable harm, adequacy of available legal remedies (e.g., damages), balance of hardships, public interest FRAND obligation = admission money will make whole? If SEP owner has a FRAND obligation, is injunction contrary to public interest (e.g., harms competition, added expense to consumers, harms innovation)? –See also Statement of FTC In the Matter of Google Inc. FTC File No (January 3, 2013) Statement released with publication of Google settlement Seeking of injunctions, competition implications

8 8 AIPLA SEPs/FRAND Concerns Reverse hold-up by standard implementer –Pressure on SEP owner to negotiate unfavorable terms E.g., imbalance in negotiating power between small, upstream SEP owner over standard not yet adopted by SSO and implementer If an injunction or exclusion order is not available to a SEP owner, then this may shift the bargaining power to the implementer Anti-trust concerns: Broadcom v. Qualcomm 501 F.3d 297 (3d Cir. 2007) –Patent holder’s intentional false promise to license SEP on FRAND terms and reliance by SSO on false promise when including patented technology in the standard = actionable anticompetitive conduct if SEP owner breaches promise

9 9 AIPLA Microsoft v. Motorola—Good Faith Negotiations and Reasonable Royalties Microsoft claiming Motorola in breach of RAND obligations (good faith, fair dealing) to SSOs (ITU, IEEE): –Motorola offered SEPs at rates that are not RAND Motorola sent two offer letters for two SEP portfolios (wireless communications, video coding standards) with RAND rate in each offer = 2.25% of the price of the end product –Motorola sought injunctive relief against Microsoft over SEPs Proceedings in US district courts, the ITC and in Germany

10 AIPLA Microsoft v. Motorola No. 10-cv-1823 (W.D. Wash., April 25, 2013) Earlier decisions: –RAND commitments create enforceable contracts between Motorola and SSOs and Microsoft entitled to enforce contract as a third party beneficiary (Order dated Feb. 27, 2012) –Motorola’s commitment to SSOs required initial offers to license be made in good faith (Oder dated June 12, 2012) –Initial offers do not have to be on RAND terms, providing that a RAND license eventually issues (Order dated October 10, 2012) Good Faith Negotiations? –In order to determine whether Motorola’s offer was in good faith, a comparison to a reasonable RAND royalty rate and a reasonable RAND royalty range (since more than one rate could be RAND) is required –Court therefore determining what is reasonable RAND licensing rate and RAND royalty range for Motorola’s SEPs

11 AIPLA Motorola: Economic Guiding Principles 1.“A RAND royalty should be set at a level consistent with the SSOs goal of promoting widespread adoption of their standards.” 2.“In the context of a dispute…a proper methodology…to determine a RAND royalty should…recognize and seek to mitigate the risk of patent hold-up that RAND commitments are intended to avoid.” 3.“Likewise, a proper methodology for determining a RAND royalty should address the risk of royalty stacking by considering the aggregate royalties that would apply if other SEP holders made royalty demands of the implementer.”

12 AIPLA Motorola: Economic Guiding Principles 4.“…the RAND commitment must guarantee that holders of valuable intellectual property will receive reasonable royalties on that property.” 5.“…a RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard.”

13 AIPLA Motorola: Hypothetical, Bi-lateral Negotiation Hypothetical negotiation between “willing licensor-willing licensee” Applied modified version of Georgia-Pacific factors –Factors applied within the RAND licensing context E.g., Past royalties received relevant if negotiated under a RAND obligation or comparable negotiations (patent pools) Hypothetical negotiation would set RAND royalty rates by looking at: –Importance of the patent portfolio to the standard; and –Importance of the standard and patent portfolio to the products at issue Motorola analysis applied in In re Innovation IP Ventures LLC 11-cv (N. Dist. IIl. ED, 3 October 2013) –Innovation IP Ventures sues on acquired patents with RAND obligations and Court asked (pre-trial) to assess quantum of potential damages

14 AIPLA Motorola: Holding District Court finds: –Video coding portfolio RAND royalty rate: cents per unit (All products) RAND royalty range: cents per unit (Windows, Xbox) –Wireless communication portfolio RAND royalty rate: cents per unit (Xbox) RAND royalty rate: 0.8 cents per unit (All other products) RAND royalty range: cents per unit (Xbox)

15 AIPLA Motorola: Jury Verdict Unanimous Jury Verdict - September 4, 2013 –Motorola breached contractual commitments to IEEE and ITU Damages incurred by Microsoft: $11,492,686 –Motorola’s conduct in seeking injunctive relief violated duty of good faith and fair dealing with respect to its contractual commitments to the IEEE and ITU Damages (attorneys fees and litigation costs) attributable to breach: $3,031,720

16 AIPLA Injunctive Relief Apple v. Motorola No cv-08540, 2012 WL (N.D. Ill. June 22, 2012) [under appeal] –Unless implementer refuses to pay a royalty that meets the FRAND requirement, the Court is not justified in granting injunctive relief –By committing to license patents on FRAND terms, patentee implicitly acknowledges that a royalty is adequate compensation Apple v. Motorola No. 3:11-cv bbc, 2012 WL (W.D. Wisc. October 29, 2012) –Depending on specific obligations to the SSO, a RAND commitment may not deprive a SEP owner from seeking injunctive relief

17 AIPLA Injunctive Relief Realtek Semiconductor v. LSI Corp. No. C RMW, 2013 WL (N.D. Cal., May 20, 2013) –Failure to offer a license on RAND terms before seeking an exclusion order or injunctive relief = breach of RAND commitment Microsoft v. Motorola No. C JLR (W.D. Wash., August 11, 2013) –Seeking injunctive relief may be a breach of the duties of good faith and fair dealing, if the SEP owner is under a RAND commitment Attorney’s fees and litigation costs as damages may be available

18 AIPLA Exclusion Orders ITC Inv. No. 337-TA-947 –Samsung successful in obtaining exclusion and cease and desist orders as against certain Apple products under 19 U.S.C. §1337 (“s. 337”) (June 4, 2013) USTR disapproves ITC order (August 3, 2013) –S. 337 gives President (USTR) ability to disapprove exclusion and cease and desist orders on policy grounds Cites DOJ/USPTO Joint Statement of January 8, 2013 re remedies for SEPs subject to voluntary FRAND commitments –Public interest: exclusion orders may pressure an implementer of a standard to accept more onerous licensing terms, affecting competition and price to consumers –In the future, ITC to: (1) thoroughly consider public interest; and (2) have a well developed factual record with specific findings on hold- up and reverse hold-up

19 AIPLA Concluding Remarks SEP Owners with FRAND obligations: –Royalty proposed in initial offer may be subject to duties of good faith and fair dealing Reasonableness of royalty: hypothetical, bi-lateral negotiation Breach of duties: damages –Seeking injunctions (exclusion orders) may be a breach of duties of good faith and fair dealing Breach of duties: Attorneys fees/litigation costs Implementers of standards: –Refusal to pay a RAND royalty may support injunctive relief (exclusion orders)

20 AIPLA THE END Thanks for your attention! Questions? Daphne C. Lainson Partner Smart & Biggar